Venezuela Plans to Split State Oil Company

Mark Jones markjones011 at tiscali.co.uk
Wed Jan 8 05:11:38 MST 2003


January 7, 2003

By GINGER THOMPSON with NEELA BANERJEE

CARACAS, Venezuela, Jan. 6 — Energy Minister Rafael Ramírez said
today that the government planned to take the state-owned oil
company, the world's fifth largest, and break it in two, hoping to
snap the back of a devastating six-week strike aimed at driving
President Hugo Chávez from power.

Mr. Ramírez, who offered preliminary details of the plan in an
interview, said the government intended a sweeping restructuring of
Petróleos de Venezuela.

The company, widely known by its Spanish acronym, Pdvsa (pronounced
peh-deh-VEH-sah), controls the largest oil fields outside the Middle
East and is an important supplier to the United States.

He said the government would "decentralize" the company by dividing
it into Pdvsa East and Pdvsa West and hollowing out the Caracas-based
management.

Such a move would effectively gut the company of middle- and upper-
level executives who have joined a coalition of business and labor
leaders in opposing Mr. Chávez, whose left-leaning policies they say
are destroying the country.

Opponents said floating such a plan amounted to government bluster
aimed at breaking the morale of what they estimate are 30,000 oil
workers who have joined the strike.

Mr. Ramírez said the goal was to restore the company's production
capacity of some 3.1 million barrels of crude oil a day while
reducing "exorbitant bureaucratic costs," which he estimated at $1
billion. He said the company produced about 14 million barrels last
month and was currently turning out 800,000 barrels a day, a quarter
of what output was before the strike.

Outside experts expressed doubts that the company was producing even
that much oil, and they were immediately skeptical that the plan
could revive production to pre-strike levels.

Ramón Espinasa, a former Pdvsa economist and now a consultant to the
Inter-American Development Bank, said such a plan could have a
devastating impact on what was once considered a model among state-
run oil companies, and an equally devastating impact on Venezuela's
oil-dependent economy. It could also reverberate through world
markets and in the United States, which imports about 14 percent of
its oil from Venezuela.

"We could talk about the need to diversify the economy, but those are
long-term goals," Mr. Espinasa said. "But right now, Venezuela's
economy needs oil. If not, the country could collapse."

The plan, experts said, appeared to be far less an economic strategy
than a political one, aimed at purging the company of Chávez
opponents once and for all and wresting more political control over
the industry, even if it means enduring sharp declines in production.

Moises Naím, former minister of trade and industry and now editor of
Foreign Policy, drew comparisons between what is happening in
Venezuela today and what happened in Iran after the Islamic
Revolution in 1979.

Iran's oil production, which rivaled Saudi Arabia's, plummeted from
six million barrels a day to less than two million. In the decades
since, Iran's oil output has been about half the pre-revolution
levels. But, Mr. Naím said, the Iranian government has tighter
political control of the industry.

"He may be willing to live with a smaller oil industry, and a less
competitive oil industry, as long as he has more control over it,"
Mr. Naím said, referring to President Chávez. "What we know is that
Chávez intends to stay in power at any cost."

In a televised address on Sunday night, Mr. Chávez said he had
assumed the rank of "oil commander" and promised to rebuild the state
company into "a new Pdvsa, a patriotic Pdvsa."

"Pdvsa is being restructured for the benefit of all Venezuelans," he
added. "In the near future we will see the fruits that we're sowing."

Mr. Ramírez rejected the view from critics, saying President Chávez
remained committed to upholding the industry's strong performance. He
acknowledged that getting the fallen industry up again was a
Herculean task. The strike has virtually paralyzed Pdvsa, shutting
down refineries and strangling exports.

But, he said, the strike had shown the government that the industry
could run with a significantly reduced labor force. Restoring oil
operations had been delayed by sabotage at most installations, he
said.

But, he added, signs of a slow but steady recovery were clear. He
cited a number of tankers that have left Venezuelan ports and the
restarting of two main oil refineries, at Puerto La Cruz and El
Palito.

No one outside the national oil company is certain of the current
state of Venezuela's oil fields. Opposition leaders, including Luis
Pacheco, a former director of corporate planning at Pdvsa, dismiss
government industry reports as "pure fiction." He estimated that the
government was producing about 200,000 barrels a day, enough to meet
minimal domestic demands and fulfill some export commitments.

Government estimates seem to vary by the hour. On Sunday night
President Chávez said the industry was exporting 1.5 million barrels
a day. On Monday morning the Pdvsa president, Ali Rodríguez, reported
that the industry was producing 600,000 barrels a day. Mr. Ramirez
put daily production at 800,000 barrels.

Outside experts estimate that the government is producing at most
400,000 barrels a day.

"Clearly, by inflating production figures, his game plan is to
psychologically wear down the workers," said Michael Shifter at the
Inter-American Dialogue, referring to President Chávez. "As time
passes, he believes, the workers will get fatigued and come back to
their jobs, before they lose them forever."

But, he said, exaggerated rhetoric runs both ways. Every day, the
opposition issues oil industry reports promising that President
Chávez is close to running out of gas — literally and politically.

"They are desperate," Mr. Shifter said of the opposition. "They feel
this is their last battle, and that if they lose, there will be no
way to get Chavez out."

Industry experts concur that "the longer the strike goes on, the more
problems Venezuela will have in reactivating their wells," said
George Beranek, manager of market analysis at the Petroleum Finance
Company, a Washington consulting group.

Much of the difficulty in restoring output arises from the unique
properties of the country's crude oil. Of the three million or so
barrels of oil a day that Venezuela once produced, about 75 percent
was heavy oil, Mr. Beranek estimated.

Heavy crude is particularly viscous, and the petroleum from
Venezuela's vast Orinoco belt is so thick that it is classified as
bitumen and must be processed at specially outfitted domestic
refineries before it can even be called oil and shipped to standard
refineries overseas. Heavy oil has a tendency to gum up unless it is
under the constant pressure and flow that is used to extract it.

So Venezuela risks permanently losing hundreds of thousands of
barrels a day in production capacity from a protracted shutdown.

In 1998, for example, when very low oil prices led Venezuela to shut
some wells, the country permanently lost 500,000 barrels a day in
capacity, said Lawrence J. Goldstein, president of the Petroleum
Industry Research Foundation.

He estimated that about one-third of Venezuelan fields could be
restored quickly, in about two weeks, based on his discussions with
experts from Petróleos de Venezuela. Most of the rest would take
another four to six weeks, he said, with about 400,000 barrels a day
of bitumen from Orinoco requiring even more time.

All that assumes that the fields were shut down properly, but few
outside Pdvsa know for sure. "From a technical standpoint, if a field
is shut down properly, it should come on properly," said a
representative of one Western oil company active in Venezuela. "But
no one really knows how the fields were shut down."


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